The lifetime value of $1 of SaaS investment is $6+

03/05/2018By Sammy Abdullah, CFA

We recently did some research showing the typical SaaS company generates $0.58 of revenue per $1.00 of investment at the time they go public. At that level of annual revenue, the lifetime value of a SaaS customer is anywhere between $6.07 and $10.61 for each $1.00 of investment assuming your net dollar retention is 104% (in line with the median). If you can achieve those two metrics: $0.58 of revenue per $1.00 of investment and 104% net retention of customers on a dollar basis, you’re on your way to going public. Below is a discussion of the data.

Why is it ok to generate less than $1 of revenue ($0.58) for each $1 invested? Because real SaaS revenue is recurring and as the data shows below, the typical SaaS business retains 104% of the prior year’s revenue when accounting for upgrades by existing customers, churn, and downgrades. The metric is known as dollar net retention and the specific formula is beginning of year revenue + upgrades from existing customers – churn – downgrades from existing customers, all in dollars of course, divided by beginning of year revenue. Hence if you started the year with $100 of existing revenue from current customers, churned $2, had $3 of downgrades, and $5 of upgrades from existing customers, your net retention is 100%.

At 104% net retention, you’re growing the existing customer base forever. Accounting for the time value of money, if you discount to today that perpetual cash flow by 10% to 15% doing a classic discounted cash flow analysis, the result is a lifetime value of the customer of $6.07 at a 10% discount rate and $10.61 at a 15% discount rate. The discount rate chosen is of course arbitrary, but the analysis is the same. Strive for earning $0.58 of revenue for each dollar invested and 104% net dollar retention each year. If you do that, as the table below shows, you’ll be in good company shortly.